Tuesday, July 10, 2018

HMRC has attracted further ire from contractors affected by plans to squeeze them for a bit more tax under IR35 rules.

After considerable prodding by contractor consultancies and other groups including freelance advisory service ContractorCalculator.co.uk, the tax agency last week released a new paper on Mutuality of Obligation (MOO) amid worries that its Check for Employment Status for Tax (CEST) service was inaccurate.

CEST is a sequence of questions asked by HMRC to determine whether a contractor falls within the IR35 framework and is therefore likely to be hit by taxation as though they were directly employed by the client, but without any of the benefits full-time employment brings.

The problems come from MOO, which is legally a bit of a murky area (at least for HMRC it seems). In employment law, it refers to the obligation of the employer to provide work and the employee to accept it. A contract obliges the employer to pay and the employee to do the work.

CEST does not include a test for MOO since HMRC assumes it is present in all public sector contractor engagements due to a slightly whiffy interpretation of the law. If there is no MOO, then the odds are the contract will be outside of IR35. Unsurprisingly, HMRC has omitted it from CEST.

With plans to extend IR35 off-payroll working into the private sector, the omission of MOO from CEST is significant.

HMRC's paper (PDF) on why it has chosen to omit MOO has done little to smooth furrowed brows on the matter. HMRC has asserted:

“Where work is provided and remuneration is paid we will assume that there is mutuality of obligation and that a contract exists,” before going on to state: “For the avoidance of doubt, the CEST online tool assumes that a contract exists or is being considered. We do not anticipate the tool being used outside of these circumstances.”

Brit IT contractor wins appeal against HMRC to pay £26k in back taxes

ContractorCalculator CEO Dave Chaplin was, unsurprisingly, unimpressed, and told us: "Judges have consistently told the taxman that simply having a contract is not sufficient MOO to be considered as a pointer towards an employment relationship."

The stakes are high. If HMRC were to admit that its CEST tool was inaccurate, a substantial number of taxpayers would be eligible for reassessment (as many as 750,000, according to Chaplin). The tax collector recently lost a case where it was demanding £26,000 in back-taxes from a public sector IT contractor.

Quite simply MOO is an essential element of IR35 status, as borne out in recent cases, and until HMRC's position is revised their CEST tool is fundamentally flawed by ignoring case law. Any rollout of IR35 reform to the private sector is unthinkable until this is resolved.

After an "exodus" of public sector contractors following the changes made in April 2017, the government must take care to avoid adding more pressure to British businesses already peering down the barrel of whatever delights 2019 will bring. ®